Don’t let your financial plans be spooked by fear

Investing

MoneyPlus Features Team

24th November 2014 at 3:06pm

Why do we seem to worry so much? Bad news seems to stick and we are drawn to read about it or watch it on the news.

As a report published by the Pew Global Attitudes Project last month shows, it’s the bad news around us, unsurprisingly, which worries us – even if the chances of us being affected are tiny.

In China, the world’s largest producer of carbon emissions, pollution and the environment are big concerns. In Ukraine, people worry about nuclear issues. In the Middle East and the UK, religious and ethnic tensions are believed to be the greatest threats.

Understanding our fears

There’s a good reason why our brains focus on fears like these. Psychologists even have a name for it: Negativity bias is how they describe people’s tendency to be influenced by, and recall, negative experiences.

Think about it. When our ancestors passed on tales of predators threatening their survival, it made evolutionary sense for everyone to store that information carefully. We tuned into fears and learned to avoid threats.

The New York Times discussed this in a lead editorial, quoting Roy F Baumeister, a psychology professor at Florida State University. “Research over and over again shows this is a basic and wide-ranging principle of psychology. Bad emotions … and bad feedback have more impact than good ones.”

In a nutshell, we hear the bad news and we ignore everything else that doesn’t fit with our perceptions and how we feel. This has considerable implications on how we all live our lives, including how we approach our finances in a positive or negative way.

“We are beginning to recognise the strong role of emotion in perception through to decision making and then on to driving action.”- Dr Lynda Shaw As Dr Lynda Shaw, a leading neuroscientist and psychologist, explains in Saving in mind, we are “beginning to recognise the strong role of emotion in perception through to decision making and then on to driving action.”

We take a look at a few examples of people’s perceptions around savings – and you can read more online on our News and MoneyPlus blog.

“We are beginning to recognise the strong role of emotion in perception through to decision making and then on to driving action.”- Dr Lynda Shaw

Safe as houses: Property versus pensions

We love to read newspaper headlines and watch TV shows about buy-to-let investors who have made fortunes.

Rising property prices over much of the past decade encouraged some of us to become landlords. Even if we didn’t buy a second property, our homes grew in value and we felt wealthier.

Using property to fund our post-work lives instead of a pension is a belief some still hold.

On the face of it, the profits can look enticing but the reality is property is a higher risk investment. If you have a buy-to-let mortgage it needs paid even when you have no tenants. Tax and expenses eat into returns; and prices and rents don’t always increase.

And whether it’s a buy-to-let or your own home you want to use as your pension, experts suggest property should be part of an overall approach which includes cash and investments to balance risk.

According to What Investment magazine (June 2014), a “worrying aspect of any trend towards people ditching pensions for property would be from a tax perspective. Pensions have many tax advantages, among them an exemption from capital gains tax” – unlike property.

Yet many of us are still in love with the idea of investing in property, partly because when it comes to bricks and mortar we make emotional decisions and can spend more time on how a property looks as opposed to the financial sense it makes.

Will investing in the stock market make sense?

There’s no such thing as a totally risk free investment. The real value of money in a bank account falls daily as interest rates lag behind inflation. With buy to let, you’re subject to the whims of the housing market. If you have money, anywhere, there’s some degree of risk.

Generally, the longer you leave your money invested the better your chance of seeing it grow. Yes your investment can go up and down and you may get back less than you paid in, but of the 1,300 or so funds with a 10 year track record, 96 per cent gave a better return than cash over that period. And the average return was 7.7 per cent a year.* (Past performance is not a guide to future performance).

So should you invest for greater return, and take more risk, or stick with cash? Why not consider doing both? The trick is to match the risk with what you want to do with your money. Money for short term needs should be lower risk and easy to access, such as a cash ISA, current accounts, or National Savings.

But for the longer term, it’s also worth considering the benefit of investing. Investment ISAs and pensions give you the potential to get a better return. And easy options do exist, where you choose how much risk to take.

*FE. IMA universe, cumulative returns, gross income reinvested to end September 2014.

Keep up with the conversation on twitter @StandardLifeUK and Facebook and you can subscribe to regular News and MoneyPlus Blog updates here.

This blog and any responses to comments are not financial advice.